Introduction

North Korea says we've declared war on them, and the market didn't really care. Aside from that there was so much to digest I don't know where to start other than at the beginning. Asian markets were mixed on election results in New Zealand and Germany. New Zealand's Nationalist Party won their election although by a smaller than expected margin while in Germany Angela Merkel's won here election with similar results. Both causing their respective currencies to fall versus the dollar as political uncertainty remains.

Japanese politics didn't help any as PM Shinzo Abe has announced a $17 billion dollar stimulus package and the dissolution of the lower house of parliament. He is seeking a stronger mandate to push further reforms. Indices throughout both regions made small moves for the most part; results were mixed, some closing up and some down. Japan led in Asia with a gain near 0.5% while Germany led in Europe with a more modest 0.03%. The Hang Send led losses with a decline of -1.36% while losses in Europe were closer to -0.30%.

Market Statistics

Futures trading indicated a slightly lower open for most of the morning. The SPX was indicated to lose about 3 points at the open with little to support it in the early hours. The open was calm, surprisingly calm in retrospect, trading near perfectly flat for a half hour before a brief rally moved up to test break even. About this time, just before 10:30AM, news from North Korea hit the wires with comments from a minister that Trump had declared war on it. This news caused a fast and rapid sell-off that left the index down about -12 points. Bottom was hit at 2,490 at which level a double bottom formed. This resulted in a move higher but less than half the days losses were recouped. By 2:45 the index was heading lower again but support was quickly found. Another bounce had it moving up by the close but still not enough to recoup the days losses.

Economic Calendar

The Economy

Not much in the way of data this morning, just the Chicago Fed's Activity Index. The index came in at -0.31%, falling from last month's 0.03%, but remains in line with economic trend. The indicator is a composite of some 85 indicators and a broad measure of the economy. It is reported in four broad categories of which 2 fell this month and 2 provided negative impact. The categories are Production and Income, Spending and Housing, Employment/unemployment and hours, and Sales, Orders and Inventories. Production and spending both contributed negatively, production fell. Employment and sales both contributed positively but employment fell.


Moody's Survey of Business Confidence gained 0.1% this week to hit 30.8%. This is a 3 week high and the 2nd week of recovery since the last dip. Mr. Zandi says the index shows global business sentiment is strong and stable as it has been all year, and that forward outlook is even stronger.


The 3rd quarter earnings cycle has begun but there are still a few weeks until peak season. So far 6 S&P 500 companies have reported with 4 beating on earnings and 4 beating on revenue. The blended rate of growth is now 4.2%, the lowest it's been in the 6 month's of data I have available. Now that the season has started, based on long running averages, we can expect to see this rise over the next 2 months with a final rate somewhere in the range of 8.5% to 9.5%.


Forward earnings outlook has firmed and likely to rise soon. This is because the energy sector is expected to lead with earnings growth in the range of 110%. With oil prices on the rise forward outlook will likely rise as well, dragging the all-index expectation with it. That being said 4th quarter outlook held steady at +11.1%, as did Q1 2018 at 10.3%. Q2 2018 fell from 10.2% to 10.1%. Full year 2017 held steady at 9.6% while full year 2018 ticked lower to 11%. Bottom line, estimates have fallen from their highs and may fall further but forward outlook is positive and strong.


The Dollar Index

The Dollar Index got a boost today that only threats from North Korea could contain. The elections in Germany and New Zealand both weakened their currencies versus the dollar while the stimulus package and snap-elections in Japan have driven another wedge between BOJ and FOMC policy. The dollar index gained a little more than a half percent to trade at the $92.50 resistance line. The index is in a consolidation within a down trend that may turn out to be a bottom. A break above resistance would be bullish in the near term at least with a chance of moving higher short to long term. If it is able to break out of this pattern and move higher next resistance is at $92.75 and then near $93.50.


The Gold Index

Gold prices had been down and trading under $1300 on a strong dollar. Then the North Korea news sent a jolt through the market and unleashed a small flood of safe-haven seekers. This drove the metal up more than 1% to trade above $1,310 but the move does not look sustainable. More North Korea news could support in the near term but near to short term outlook for the dollar is bullish so gains in gold will likely be limited and could easily reverse.

The gold miners got a boost from gold's gains. The miners ETF GDX rose nearly 1.5% creating a long green candle moving up from support and capped by resistance. Support is the long term moving average near $23, resistance is the short term moving average near $23.75 and a previous level of resistance within the long term trading range. The indicators are rolling into a bullish signal that has yet to confirm. A move above resistance would be bullish but only near term with next target at $24.75. Gold may move higher near term, longer term it looks firmly range bound.


The Oil Index

The oil price move up today and set a 5 month high. The price gained nearly 3% to trade above $52 as a number of bullish catalyst work their way through the market. The first is expectations for OPEC to extend its production cut. The second is an increase of demand forecast by OPEC and others for this year and next. Third are signs from the CFTC that hedge funds are getting increasingly bullish on oil prices. Long term prices may remain low relative to the peak but near term is bullish with upside target at $55.

The Oil Index gained about 1.5% to create a long green bodied candle and set another new high. The index has now moved higher for 22 of 25 days and showing evidence of steady, continued and strong buying within the sector. There may be a pullback, if there is it'll be a buying op, but I don't know that it's going to happen anytime soon without a dip in oil prices. The sector was expecting 100% earnings growth on $45 oil, now that prices are moving up forward expectations for the sector will grow. The play for now may be to sell puts, make some cash up front with a chance to buy on a dip.


In The News, Story Stocks and Earnings

Apple fell another -1% today as reportedly tells it suppliers to slow down on iPhoneX production. The news is yet another slam to iPhone bulls who were betting on a big roll out. Today's action brings the stock down to just above support targets at the long term moving average and in a range where long term investors may begin to get interested again. The indicators are bearish and gaining strength so I would expect to see support tested and possibly retested before bouncing. The long term trend is still up and this is Apple we're talking about.


Target announced it would raise its minimum wage to $11 in October and to include seasonal holiday employees in the new wage. The company is going to raise it further over the next few years with a target of $15 by 2020. The news did not seem to phase investors, I'd have thought the idea of lower profits or higher prices for product would scare people off. The stock fell early, opened at support and then rose throughout the day. The candle is small but green, confirming support at the long term moving average. The short term moving average is just below the longer term and looks like it could crossover in the near term.


The VIX spiked today but it doesn't look like it will develop into much yet. The move created a medium sized candle with long upper shadow testing resistance near the short term moving average and the $11 level. The indicators are rolling over and showing a bullish buy signal so resistance may be tested again. A move above $12 would be bullish and consistent with correction. So long as it doesn't go above $16 any correction that may come will likely be short and shallow.


The Indices

The indices began the day tentatively, there is a lot going on without North Korean antics and reason enough to be wary. The North Korean news sent the market moving lower but the move was a head-fake. By the end of the day the candles were looking optimistic and one index in particular set a new high. The Dow Jones Transportation Average gained 0.11% and is now a hairs breadth away from tickling its all time high. The index is drifting up following the break of a near term continuation pattern. The indicators are bullish and on the rise with positive forward economic outlook so I am bullish. That being said resistance is at the all time high and may cause consolidation or pull back, if so I would view it as a buying opportunity.


The NASDAQ Composite fell the hardest, -0.87%, and created a smallish red bodied candle with visible lower shadow. Today's candle tests support at the short term moving average and at least indicates there is some there. I'd say it confirms if not for the close below the moving average and the bearish indicators. The indicators are pointing lower after bearish crossovers and consistent with a test of support and/or move lower. A confirmed break of the moving average would be bearish with downside target near 6,250 and the long term up trend line. A bounce form the short term moving average would confirm support, be bullish and trend following.


The Dow Jones Industrial Average made the 2nd largest decline, -0.23%. The blue chips created a small hammer doji sitting on a long term up trend line and a small test of support. The indicators are consistent with a crest within an up trend but have not yet turned bearish. Support is the up trend line in the near term, a break below there may not fall far as the short term moving average is just below. A break below that would be more bearish with downside target near near 21,750. A bounce from the up trend line would be bullish, trend following and confirm support.


The S&P 500 closed with a loss of -0.22% and just ahead of the blue chips. The broad market created a small hammer like doji candle just above the short term moving average. Today's action is bearish in the near term and a test of support. The indicators are consistent with this test and suggest a move down to the moving average at 2,380 may be possible. A break below 2,380 could take it down to the long term trend line near 2,450. A bounce from current levels and/or the short term moving average would be bullish and trend following.


Today's news was mainly geopolitical, had little impact on economic or growth outlook and was shrugged off by the market. The indices themselves are a bit mixed but generally consistent with consolidation and rotation within an up trend. We may see today's weakness develop into a stronger test of support but at this time it does not look like a major correction is brewing. With earnings season at hand and expectations for this quarter, next quarter and all of next year I just don't see any reason to sell other than on news or some development that hasn't happened yet (to my knowledge). I am bullish for the long term and eyeing this dip as a buying opportunity for the near term.

Until then, remember the trend!

Thomas Hughes